Xiaomi In New Mega-Funding

Xiaomi nears new mega-funding round

A year after its last major capital raising, smartphone maker Xiaomi is reportedly closing in on a new mega-funding round that would be one of the largest ever for a Chinese tech start-up, worth $2 billion or more. The massive new funding would come as the company rapidly ramps up its sales and product offerings in the second year after the launch of its inaugural smartphone. Equally interesting, some reports are saying a major investor in this new funding round could be Internet giant Tencent (HKEx: 700), which has been relatively quiet during a recent flurry of M&A happening in China’s online space.

The reports on this latest funding round also come as Xiaomi has released some of its latest financials, which show sales continued to post strong momentum in the first half of this year. Of course it would be quite disappointing if sales weren’t growing strongly at this stage, since Xiaomi only began selling its high-performance smartphones in 2012, and has already absorbed hundreds of millions of dollars in outside investment.

The latest reports are somewhat conflicting, with some saying the company has already closed its latest funding round and others saying it expects to close the deal by the end of this month. (English article; Chinese article) Xiaomi’s valuation based on this latest investment also varies in the different reports, but the general consensus seems to be the injection would value the company at between $9 billion and $10 billion. That means the new investors are most likely getting around 20-25 percent of Xiaomi in this latest funding.

One report says Tencent is taking part in the new funding round, making its investment through Russia’s Digital Sky Technologies (DST), an early supporter of Facebook (Nasdaq: FB) and an active investor in China’s Internet space. DST itself took part in Xiaomi’s last funding round a year ago, in which the company raised $216 million. (previous post)

This latest valuation would be more than double the $4 billion that Xiaomi was worth a year ago and is quite impressive for such a young company, which has positioned itself as a maker of “cool” high-performance smartphones with mid-range price tags.

Earlier this month Xiaomi said its revenue reached 13.3 billion yuan ($2.2 billion) in the first half of 2013, with most of that coming from its sale of about 7 million smartphones. (English article) The first-half revenue figure was higher than Xiaomi’s sales for all of 2012, and the smartphone figure was just slightly lower than the company’s unit sales for all of last year.

Of course I would be remiss if I didn’t point out that Xiaomi hasn’t done nearly as well with its other major launch of an Internet TV product that ran into regulatory problems last year. The company has also had problems with its plans for a low-end smartphone, and is also reportedly developing a tablet PC, as it develops a product line that looks increasingly similar to that of US tech giant Apple (Nasdaq: AAPL).

So, what’s next for this fast-growing, cash-hungry company? I predicted after the fund-raising last year that we could soon see some of Xiaomi’s investors selling their stakes, in the run-up to a possible IPO. Clearly that didn’t happen, as the IPO market remained frigid throughout 2012.

The market does appear to finally be coming back to life, though only profitable companies are getting a good reception — a qualification that Xiaomi probably has yet to reach. Accordingly, I wouldn’t expect the company to try for an IPO this year. But I do expect that Xiaomi could turn profitable as soon as late this year or in early 2014, and if that happens we could see a public offering as soon as the middle of next year.

Bottom line: Xiaomi’s latest funding round will be a blockbuster deal that values it at up to $10 billion, and could be followed by an IPO as soon as mid-2014.

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This article was first published in the online edition of the South China Morning Post at www.scmp.com.

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